Bulletin – December Quarter 2010
China's Steel Industry

Abstract

China's steel industry has grown rapidly in recent decades, with China now the
world's largest producer and consumer of steel. This has resulted in a
sharp increase in demand for iron ore and coal, Australia's two largest
exports, which are key inputs for the steelmaking process. This article discusses
the growth of the Chinese steel industry over the past couple of decades.

Introduction

Over the past 30 years, China's steel production has increased at a rapid pace
as the economy has industrialised and urbanised. The expansion of steel production,
particularly over the past decade, has been a significant driver of China's
demand for raw materials, especially iron ore and coking coal. This has resulted
in a considerable increase in China's imports of these commodities. This
article discusses the Chinese steel industry, focusing on its structure, the
geographical distribution of its steel production and recent developments.

Growth of the Chinese Steel Industry

Since the introduction of market-based economic reforms in 1978, the Chinese economy
has grown strongly, recording an average annual growth rate of around 10 per
cent. Over this period, Chinese steel production has also expanded rapidly,
growing at an average annual rate of 7 per cent during the 1980s, 10 per cent
during the 1990s and close to 20 per cent in the 2000s (Graph 1).

Graph 1

This expansion reflects the large-scale industrialisation and urbanisation of the
Chinese economy over this period, developments which have driven much of the
growth of investment in infrastructure, buildings and machinery. The process
of industrialisation has also been accompanied, to some extent, by market liberalisation
in the steel sector. This includes efforts to increase the autonomy of state-owned
enterprises in the early 1980s that gave steel companies some independence
from the government, and allowed them to invest surplus funds to improve their
facilities and expand their productive capacity. Through the 1980s and 1990s,
the productivity of the sector was enhanced by the opening up of China to foreign
trade and investment, which gave Chinese steel producers increased access to
advanced technologies.

The sustained growth in steel production has seen a pronounced rise in the ‘steel
intensity’ of the Chinese economy (measured as steel output per unit
of GDP), which is broadly similar to increases that have occurred in other
countries that have industrialised and urbanised (Graph 2). If China is
to follow the same general pattern, a decline in steel intensity would be expected
over time as the service sector expands, although steel intensity could stay
high for another decade or so.

Graph 2

The combination of strong economic growth and rising steel intensity has resulted
in a steady rise in China's share of global steel production over the past
10 years. China now accounts for around 45 per cent of global steel production,
which is significantly higher than its share of 15 per cent at the start of
the decade (Graph 3).

Graph 3

Structure of the Chinese Steel Industry

The Chinese steel industry is highly decentralised, consisting of a relatively small
number of large, advanced steelmakers and a large number of small- and medium-sized
firms that produce lower-value steel products. In 2008, there were more than
660 companies producing crude steel, with thousands of other firms producing
finished steel and steel-related products. The top 10 producers accounted for
less than 50 per cent of crude steel output, with the next 75 companies accounting
for an additional 30 per cent (State Council 2009, CISA 2009). Most of the
larger Chinese steel producers are state-owned, while a significant proportion
of the smaller producers are private companies.

Geographically, the industry is widely dispersed. The coastal provinces account for
around 65 per cent of crude steel production, with the concentration of steel
production in the north-east of the country partly reflecting proximity to
major iron ore mines, particularly in Hebei and Inner Mongolia (Figure 1).
The north-eastern ports of Qingdao (Shandong province), Shijiazhuang (Hebei
province) and Tianjin received more than half of China's iron ore imports
in 2009, consistent with their proximity to major steel-producing centres (The
TEX Report 2010).

The decentralised structure of the industry and the physical dispersion of steel
production have raised concerns among Chinese policy-makers that the industry's
lack of consolidation may be hampering its ability to exploit economies of
scale. Concerns about consolidation have sometimes also been linked to perceptions
of overcapacity in some parts of the industry, especially the presence of a
large number of small, relatively inefficient producers. The continued use
of outdated, high-polluting facilities by some smaller producers has also prompted
concerns about the impact on the environment.

In July 2005, the National Development and Reform Commission issued a formal policy
on steel that sought to spur consolidation by increasing the concentration
of steel production among large producers, and to protect the environment by
reducing energy consumption and eliminating obsolete production capacity. Targets
for industry consolidation through mergers and acquisitions or closures of
small- to medium-sized firms were outlined. In June 2010, the State Council
updated these targets, announcing that the production share of the 10 largest
steelmakers was to rise from 44 per cent in 2009 to 60 per cent by 2015, with
a goal of cultivating three to five very large, internationally competitive
iron and steel conglomerates (State Council 2010).

Steelmaking in China

Crude (or unprocessed) steel can be produced either directly from iron ore and coking
coal using the blast furnace/basic oxygen converter method, or from scrap steel
(and other inputs) using the electric arc furnace method. In the United States
and Europe, where the electric arc furnace technology is commonly used, between
one-half and two-thirds of steel is produced using scrap. In contrast, in China
more than 90 per cent of crude steel is produced by steelworks using blast
furnaces and basic oxygen converters (World Steel Association 2010). This reflects
difficulties with the supply of electricity in some parts of China and low
domestic availability of ferrous scrap, due to relatively low household consumption
of steel-intensive manufactures and limited scrap collection and processing
systems. The prevalence of the converter method has important implications
for resource demand: on average, each tonne of Chinese steel requires around
1.7 tonnes of iron ore and more than half a tonne of coking coal as inputs.
This helps explain the significant increase in China's demand for these
resources over the past decade.

The demand for raw materials is met from both domestic and foreign sources, but the
majority of iron ore is sourced from abroad. China is itself a major producer
of iron ore and possesses extensive reserves. However, these reserves have
relatively low average iron content at around 33 per cent, compared with 62
per cent in Australia and around 65 per cent in Brazil and India (Jorgenson
2010). This lower iron content makes it more expensive to process. Moreover,
the bulk of iron ore reserves are located inland in the north and west of China.
While steel mills in the north-east are close to major iron ore mining precincts,
it is costly to transport ore to steel mills located elsewhere in the country.

Strong demand for steel has seen the imported share of iron ore supply increase from
around 10 per cent in the late 1980s to more than 50 per cent currently (Graph 4),
although over the past five years China's iron ore output has generally
kept pace with growth in steel production. This reflects a number of factors,
including the high price of imported iron ore and the temporary downturn in
steel demand associated with the global financial crisis. More recently, iron
ore imports have remained at a high level, having picked up sharply as the
Chinese economy recovered from the downturn in late 2008 and early 2009 aided
by the substantial fiscal stimulus, although domestic production has also been
strong.

Graph 4

In recent years, more than 80 per cent of China's iron ore imports have come
from Australia, Brazil and India. In an effort to diversify supply, Chinese
policymakers have encouraged direct investment by Chinese companies in iron
ore exploration and iron ore mines abroad. To date, numerous investments have
been made in West Africa, South America, Central Asia, Russia, Australia and
Canada, many of which are large in scale. While efforts to diversify supply
may have implications for the Chinese steel industry's sourcing of raw
materials in the future, the likelihood of continued high rates of economic
growth suggests that China's imports of raw materials will remain high.

Until very recently, China was largely self-sufficient in coking coal, with domestic
production supplying the bulk of the steel industry's needs. However, in
the first half of 2009, coking coal imports surged, with a pronounced effect
on Australian coking coal exports to China. This surge reflected a combination
of factors, including a strong rise in steel production, a significant decline
in international freight rates, and lower Chinese production of coal owing
to efforts to consolidate the coal sector and mine closures or renovations
for safety reasons. While China has extensive reserves of coking coal, many
of its existing deposits are relatively inaccessible and therefore costly to
mine. Many of these deposits are also far from major steel-producing areas
(ABARE 2009, 2010).

Supply and Demand

On the supply side, China's steel industry has traditionally focused on the production
of ‘long’ products, which are widely used in residential and non-residential
construction (such as bars, wires, tubes and sections). However, in recent
years, higher value ‘flat’ products, which are used extensively
in manufacturing (such as steel strips and sheets), have accounted for a rising
share of production (Graph 5). Although China can satisfy most of its
own steel requirements, the composition of its production has meant that over
recent years around 2½ per cent of steel has been imported, especially
some higher quality, technology-intensive flat products.

Graph 5

The main source of steel demand is investment in buildings, structures and machinery.
Over the past three decades, gross fixed capital formation has risen from around
30 per cent of GDP to around 45 per cent, partly driven by reforms opening
up China's internal and external markets, and a large-scale process of
rural-urban migration. The construction industry is the largest direct consumer
of Chinese steel products, accounting for more than one-half of steel consumption
(Table 1), consistent with a product mix emphasising long products. However,
at least a quarter of steel consumption can be considered broadly as ‘manufacturing’,
including the machinery, automobile and home appliance
industries.[1]

Table 1: Chinese Steel Consumption by Industry in 2008

Per cent

Industry

Share of total steel consumption

Construction

54

Machinery

18

Automobile

6

Home appliance

2

Rail, shipping and fuel(a)

5

Other

15

(a) ‘Rail, shipping and fuel’ is defined as the sum of the ‘container’,
‘railway’, ‘shipbuilding’ and ‘petroleum’
categories

Source: Wu (2009)

Since 2006, China has been a net exporter of steel products (Graph 6). The early
2000s saw a large increase in steelmaking capacity, partly reflecting an increase
in the number of small- and medium-sized firms; this growth in capacity translated
into higher production, some of which flowed onto the international market.
Since China's accession to the World Trade Organization in 2001, the volume
of steel exports has increased noticeably; however, steel exports have not
recorded sustained growth, and over the past few years have been declining
as a share of total domestic production. At times when steel production has
risen faster than domestic demand for steel, such as during the 2008 slowdown,
China's steel exports have surged, only to decline again when domestic
demand for steel has recovered, as was the case during 2009.

Graph 6

Recent Developments

Having grown very rapidly since the start of the decade, steel output slowed sharply
in 2008 as growth in the Chinese economy eased in line with the global downturn.
In late 2008 the government announced a large-scale fiscal stimulus package
focused on public infrastructure and housing construction, which boosted GDP
growth substantially in 2009 and generated significant demand for steel. Although
growth in fixed asset investment has eased over the past year, it remains high,
particularly in the manufacturing and real estate sectors, and growth in automobile
production has been robust. While these indicators suggest that final demand
for steel has remained solid, in 2010 to date there has been little growth
in the production of finished steel products, and crude steel production has
moderated (Graph 7).

Graph 7

This recent slowing in steel production reflects a combination of factors, including
policy measures introduced by the central government in April 2010 aimed at
cooling the property market, and the scrapping of export rebates for 48 steel
products in July. In addition, selected steel mills received notices in September
to reduce steel production by the end of 2010 in an effort to meet national
five-year energy intensity targets, which form part of the government's
environmental objectives. Despite the relatively subdued production of steel,
China's demand for resources has been strong and this is reflected in higher
prices for iron ore and coking coal, which have contributed significantly to
Australia's high terms of trade (Graph 8). As the Chinese economy
develops and the urbanisation process continues over the next decade or so,
the production and consumption of steel are likely to rise further, underpinning
strong demand for both iron ore and coking coal.

Graph 8

Footnotes

Alternative estimates from China's official input-output tables suggest that,
in value terms, manufacturing may account for a somewhat larger share of
steel consumption than implied by these figures (Roberts and Rush 2010).
[1]

State Council (General Office of the State Council of the People's Republic of
China) (2009),
(Iron and Steel Industry Restructuring
and Revitalisation Plan), 20 March.
Available at: <http://www.gov.cn/zwgk/2009-03/20/content_1264318.htm>.

State Council (2010),
(Several Observations on Boosting Energy Conservation and Emissions Reductions and
Accelerating Restructuring of the Iron and Steel Industry), Document No 34
(2010), 17 June.
Available at: <http://www.gov.cn/zwgk/2010-06/17/content_1629386.htm>.